UKDC Publications : SOUNDINGS - Issue 1 2005

It has long been the general rule under English law that damages for breach of contract are assessed at the date of the breach. In addition, damages are compensatory in nature, placing the innocent party in the same financial position as if the contract had been performed. The recent case for owner Members of the GOLDEN VICTORY demonstrates that the general rule can give way to the compensatory rule where the assessment of damages at a later date more accurately reflects the claimant's loss. Future events can therefore dramatically affect the true value of contractual rights.

The charterparty - breach of contract

The GOLDEN VICTORY was chartered on Shelltime 4 Form in July 1998 to NYK. The charter was unusually lengthy, for 7 years one month more or less. She was delivered in January 1999. However, following a dispute between the owner and charterer, the charterer redelivered the ship in December 2001 with 4 years left to run. An arbitral tribunal upheld the owner's claim for repudiatory breach and determined the earliest redelivery date was 6th December 2005. Built into the charter was a minimum charter rate of $31,200 per day supplemented by a profit share agreement. The owner therefore claimed the difference between the contractual rate and the market rate, at the time of the breach, for a substitute contract for the remaining period of the fixture. On any estimation, that left the owner with the potential for a substantial damages claim.

The contractual option to cancel

The charterparty provided that if war or hostilities broke out between, among others, Iraq and the USA, both parties would have the right to cancel the charter. In view of this clause, the charterer argued that the outbreak of the second Gulf war in March 2003 imposed a cut off point for the payment of damages. No damages were therefore due to owners after March 2003, as the charterer would undoubtedly have exercised its right to cancel at that point. To pay damages after that point, it was argued, would be a windfall for the owner.

The tribunal were asked to consider whether the Iraq conflict placed a time limit on the owner's damages claim. The tribunal had therefore to consider at what moment one should judge the likelihood of war occurring:

• at the date or the breach; or
• at any point up to the final judicial assessment of damages.

The owner relied on the MIHALIS ANGELOS [1971] 1 QB 364, the leading case on when damages are to be assessed and to what extent an event post-dating a breach can influence an award of damages.

The MIHALIS ANGELOS

The MIHALIS ANGELOS involved a voyage charter to carry mineral oil from Haiphong to North Vietnam. Prior to the ship's arrival at the loadport, the charterer purported to cancel the charterparty, relying on force majeure. The charterer claimed that there was no ore available at Haiphong due to warlike activities over North Vietnam. The charterer was found to be in repudiatory breach, but despite this, the court only awarded the owner nominal damages. It held that if the charter had not been terminated, the charterer would in any event have been entitled to cancel it 3 days later, pursuant to the canceling clause. The ship could not reach the loadport prior to the cancellation date. The court found that "beyond doubt" the charterer would have cancelled the charter on the ship's belated arrival. Lord Denning stated:

"...You must take into account all contingencies which might have reduced or extinguished the loss...It follows that if the defendant has under the contract an option which would reduce or extinguish the loss, it will be assumed that he would exercise it. In short, the plaintiff must be compensated for such loss as he would have suffered if there had been no renunciation, but not if he would have lost nothing."

The court found that it could take into account events following repudiation when assessing damages. Contractual rights could become valueless if the contract could otherwise be terminated after repudiation, on the happening of certain events, in this case belated arrival. Lord Justice Megaw did however indicate that those events had to be '...at the date of acceptance of the repudiation, predestined to happen'. The GOLDEN VICTORY owner relied on this dictum.

War - possibility or predestiny?

In the GOLDEN VICTORY, the events relied on were some 14 months after the repudiation. The owner argued that at the time of the repudiation, war was not 'predestined' to break out. The charterer argued that assessment of the likelihood of war was not fixed in time to December 2001, but to any time up to assessment of damages. By the time the case reached arbitration, war had broken out.

The sole arbitrator favoured the owner's position as the more orthodox approach to damages. They should be calculable at the date of the breach and in the prevailing circumstances of the market that then existed, not on determination of damages in proceedings to enforce a claimant's rights in what could be very different circumstances (in this case years later). He agreed with the owner that a policy of 'crystallisation' of the parties' rights had a number of obvious advantages including the need for certainty in commercial matters, with the advantage of finality and encouragement of settlement. That way there could be no fluctuation in damages as events develop, or the hope that those events might be helpful to the guilty party. However, despite preferring the owner's case, he felt bound by the High Court's approach in the SEAFLOWER [2000] 2 Lloyd's Rep 37 & [2001] 1 Lloyd's Rep 341.

The SEAFLOWER

The SEAFLOWER (reported in SOUNDINGS Issue 1 2001) involved an oil major approvals clause. The charterer had terminated the charter (for repudiatory breach) and argued that, in any event, it would have been entitled to cancel two months later, for failure to regain the ship's Mobil approval. Mr Justice Timothy Walker, at first instance, did not consider he was limited by the approach of Lord Justice Megaw in the MIHALIS ANGELOS, stating:

'If the contract would inevitably have come to an end earlier than its due date anyway, it is right that the damages should be limited accordingly, regardless of whether or not the event was predestined at the date of the repudiation.'

He found it inevitable the charter would have come to an end regardless of whether failure to regain the Mobil approval (giving rise to contractual termination) was predestined at the time of repudiation.

As the tribunal felt bound by the SEAFLOWER, it was unnecessary to assess whether the second Gulf war was unavoidable at the date of the breach. However, the tribunal did consider the point concluding that, at that point in time, war between Iraq and the USA was 'merely a possibility', but not 'inevitable or even probable'. The tribunal found a presumption that the charterer would have cancelled the charter on the outbreak of war. On the facts, this presumption was not rebutted and the owner's right to damages was thereby limited in time.

The Court decisions

With the support of the Association, the owner appealed. The point of law for the court to determine was whether the war clause curtailed the owner's right to recover damages post March 2003.

The court agreed with the tribunal's ruling but held that the shorter period was relevant as a matter of principle, not on the basis of the SEAFLOWER. Damages should be assessed under ordinary principles of causation and proof of loss. So the owner could not, where there was an available market for the ship, simply recover the difference between the charter and market rate for the balance of the charter period. The owner would be unable to show that the charterer's breach caused their loss after the outbreak of war. At that point the charterer would have been entitled to and would have terminated the contract. The court accepted the desirability of certainty but noted that the charterparty itself contained the uncertainty of the war clause. That should not be ignored in assessing the owner's loss.

The owner appealed. Lord Mance, in the Court of Appeal, indicating the case raised a 'short point of some novelty and difficulty' reconfirmed the earlier rulings. The owner was never entitled to absolute confidence that the charterparty would run its full course to December 2005. As a result of the repudiation, what they lost was a charterparty with 4 years left to run but subject to the war clause. Lord Mance held:

"...The assessment of damages often depends on, or is informed by subsequent events...The additional need to take into account the now known fact of the Second Gulf War is simply another instance."

The desirability of certainty and finality must yield to a more accurate assessment of the owner's loss.

So what is the value of a contract lost on the date it is lost? One cannot assume a right to have that contract completed. A defendant is not bound to perform a contract where there is a contractual right to terminate upon the happening of certain extraneous events. On this basis, when accepting a repudiatory breach, Members need to consider carefully the future events provided for in their contracts. Even if those events are neither probable nor inevitable at the time of the breach, they may limit their entitlement to damages.

For further information on any matters covered by SOUNDINGS, please contact the Managers.